236 F. 387 | E.D. Mich. | 1915
Lead Opinion
If the final hearing were to be delayed one or two years, as counsel seem to think probable, we would have to pass definitely at this time upon the application as presented. . In that event, we should require further development of the facts in some directions — as, for example, regarding the depreciation charge to operating expenses recommended by the Interstate Commerce Commission, but not actually made by plaintiff, and the propriety of employing the factor of speed in reaching the composite use unit adopted by plaintiff, as well as the accuracy of tire speeds assumed; but, if a speedy final hearing can be had, these additional matters can be there developed to better advantage than by ex parte affidavits. We are satisfied that such final hearing can be had, and within a very brief time; and we therefore
The reason why it has been assumed that there must he a long delay seems to be that detailed expert adversary appraisals are thought to be necessary. We are not so impressed. The difference between the valuation claimed by plaintiff and the valuation fixed by the state for taxing purposes is not great enough to require such appraisals. From the evidence now available to both parties, it would seem that the court could fix an approximate valuation, and we cannot think that the issue whether or not there is confiscation could be controlled by the comparatively small difference which might develop between the result of detailed appraisal and the result obtainable by more general methods.
We all concur in the belief of the District Judge, who will be the trial judge, that, under the facts shown by the record and those of which the court takes judicial notice, neither party can be prejudiced by requiring prompt final hearing on the merits.
The clerk will notify both counsel of the filing of this memorandum.
Opinion on the Merits
On the Merits.
Bill filed by the Ann Arbor Railroad Company to set aside the two-cent fare law of the state of Michigan and the orders of the Michigan Railroad Commission fixing the freight rates.
The power to control and regulate public utility corporations is vested in the legislative and not in the judicial branch of the government. Courts can neither make rates nor review and revise those made by competent authority. Unless the law-making body so far transgresses fundamental law as to commit a legislative theft, the courts may not interfere. With reference to permitted returns upon invested capital, the margin between full and complete adequacy and confiscation may be quite wide. Hence, in a doubtful case, a court may not substitute its" judgment for that of the Legislature. Hence, also, the settled rule that, to warrant a decree declaring a rate statute invalid, the proof that such statute necessarily results in confiscation must be clear, satisfactory, and convincing.
Values.
The first important factor in determining the net return which the railroad company is receiving is the value of the property upon which such return is to be computed. According to plaintiffs schedules, prepared by its chief engineer, the total present value (as of June 30, 1914) of its property in Michigan, exclusive of working assets, car ferries, and dock property, is $8,631,967, made up of these items: Fixed property of every kind, $5,100,872; rolling stock, $2,351,271; and “overheads,” $1,179,824. According to the same schedules the total present value (as of June 30, 1915) of its Michigan property, exclusive of working assets, car ferries, and dock property, is $8,307,455, made up of these items: Fixed property, $4,925,657; rolling stock, $2,207,725; and “overheads,” $1,174,073. According to other schedules prepared for plaintiff by an expert accountant, its working capital for the year 1914 was $306,688, and the value of that part' of the station building in Toledo, Ohio, used for general administrative purposes, was $25,735, making a total value of all properties in Michigan, except car ferries and docks, for that year, $8,964,390. In 1915, according to the same expert, the corresponding figures were as follows: Working capital, $327,487; station building at Toledo, $25,092; and total value, $8,660,034.
Some of plaintiff’s freight cars are old and out of date, and, because of their small size and capacity, cannot be used economically under present competitive conditions. Some of its passenger _ coaches are not modern. Its gasoline motor cars were constructed in 1911. Since then there have been many improvements in the design and structure of gasoline motors. The advance in railroad motor construction has been, to a lesser extent and degree, similar to that made in the automobile industry. An agent' of the builder of these motor cars testified that cars of their type are not now being built. The theory of reproduction new less a flat percentage of annual depreciation does not sufficiently recognize the lessening of values of equipment by reason of its becoming obsolete. However, for the purpose of this case and for want of a better one, this method of determining values may be adopted, although it is not approved in its entirety.
Right of Way and Station Grounds. — The valuation placed upon the right of way and station grounds, exclusive of‘all improvements thereon, is $397,104, to which sum has been added more than 14 per cent, thereof for so-called “overheads.” This basic valuation has been reached by applying to the right of way without improvements the estimated values of adjacent lands, including all buildings and other improvements. It is sufficient to say that this method of computing values and the practice of adding “overheads” to actual values are contrary to the letter and the spirit of the rule laid down by the Supreme Court in the Minnesota Rate Cases, 230 U. S. 352, 33 Sup. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. Numerous witnesses for the defendants have testified that the aggregate present value of the lands constituting plaintiff’s right of way and station grounds is the sum of $246,615. Apparently these witnesses speak from actual knowledge, and their valuations are adopted as being more nearly correct.
Fences. — Plaintiff’s valuation of the fences along its right of way at $125,440 is conceded to be erroneous, and defendants’ figures ($54,-908) will be substituted therefor.
Depreciation. — Contrary to the schedules presented, and notwithstanding the testimony of the engineers, counsel for plaintiff, at the final arguments, earnestly insisted that no depreciation should be charged against the roadbed and track structure of the railroad. This contention cannot be sustained. The evidence shows that the life of ties is from 8 to 10 years, and of steel rails and track, fastenings about 20 years. Ballast must be renewed, and bridges, trestles, and culverts decay and must be replaced. In short, each unit of the track structure is perishable, and, notwithstanding repairs, at some time reaches the end of its life. The engineers testify that a track structure as old'as
Appreciation. — Counsel for plaintiff also insist, and the evidence indicates, that the roadbed of a railroad appreciates in value, at least during the first few years after construction. The grade becomes more compact and solid with age and use, and the slopes of the grade and the ditches become covered with vegetation, which tends to prevent erosion. However, no allowance is made for such appreciation in any of plaintiff’s schedules or computations, and there is no evidence from which the value of such appreciation can be determined with any degree of certainty. It is trite that one witness testified that a larger number of section men are required to keep in condition a new railroad than an old one. This may be owing to the fact that a new railroad is seldom in a normally perfect condition of completion at the beginning of its operation. At any rate, this testimony does not furnish a sound basis for the allowance of additional values.
Overheads. — Proceeding upon the theory that valúas are to be ascertained and fixed upon the basis of the actual rebuilding of the railroad, plaintiff has added overheads amounting to upwards of $1,000,000 and composed of the following items: 4% Percent, of the reproduction cost of its fixed properties, without depreciation for “survey and engineering expenses and superintendence during construction”; 4 per cent, of the reproduction cost (without depreciation) of its fixed properties and rolling stock, including engineering expenses, for “interest during construction (3 per cent.) and legal expenses and organization (1 per cent.)”; and, for “contingencies 7% per cent., depreciated to 5% per cent.” on the total reproduction cost of its fixed and personal property. Possibly it may be permissible in a rate case like this one, where values are computed by the method of reproduction less depreciation, to add something for engineering expenáes and interest during construction and for legal and organization expenses although the last item is more than doubtful. But the evidence in the present case furnishes no warrant or justification for an allowance for contingencies. Contingencies are said to be of two kinds: Those of inventory and those of construction. In these days of highly systematized work there is little chance of omissions in inventory, and, while in theory this railroad is to be reconstructed, in fact it is already built and in operation, and there can be no unknown contingencies of construction. Moreover, costs of construction which make up plaintiff’s valuations have been fixed at top prices charged by contractors and builders, who assume all the risks of contingent losses. Ties are valued from 10 to 25 per cent, higher than the actual cost to this company. The cost of grading and track-laying is figured upon the basis of contract prices from 10 to 30 per cent, greater than those prevailing even in these days of high prices. In fact, each item or class of property has been valued sufficiently high to include a safe and sufficient margin for contingencies, and no sound reason exists for the allowance of an additional lump sum to cover improbable losses.
Car Perries and Docks. — Plaintiff claims that its car ferries and dock property are worth $761,346. Before the final hearing of this case plaintiff had discontinued its translake passenger business, and a very small percentage of its translake freight business is intrastate. Besides, the statute and orders here attacked do not affect or control in any way the rates or charges for lake transportation. Competitive conditions are solely responsible for the unremunerative charges for this service. It follows that, at least as to passenger rates, the value of the car ferries and dock property should not be considered.
Summary. — Condensed schedules or tables of the values of plaintiff’s v property in Michigan, revised and corrected as above stated, are as follows:
1914.
Right of way and station grounds. $ 246,615 00
Other fixed property. 4,633,236 00
Engineering expenses during construction (4% per cent, of 85,-446,638) ...... 245,098 00
Rolling stock and equipment... 2,351,271 00
Interest during construction and legal expenses and organization (4 per cent, of 89,083,115)..... 363,325 00
Working capital .... 149,570 00
Toledo Terminal used for general administrative purposes. 25,735 00
Total ..... 88,014,850 00
1915.
Right of way and station grounds...... • • ..8 246,615 00
Other fixed property......*. 4,457,144 00
Engineering expenses during construction (4% per cent, of 85,-488,766) .. .. 246,995 00
Rolling stock and equipment...... 2,207,725 00
Interest during! construction and legal expenses and organization (4 per cent, of 89,002,631).... 360,105 00
Working capital.. .. 144,265 00
Toledo Terminal used for general administrative purposes. 25,092 00
Total ... 8T>6S7,941 00
In the apportionment and division of values and operating expenses of the railroad property in common service in all classes of traffic, the experts upon both sides of this controversy have advanced and employed many methods and theories, the greater number of which are new, untried, and hence unapproved. To discuss these theories separately and in detail would prolong this opinion beyond reasonable or proper limits. However, in the view taken, it is unnecessary to enter upon such a discussion. The right result and conclusion will be reached if, except as othenvise stated, the theories and methods of plaintiff’s expert witnesses are accepted and employed. But it must be distinctly understood that the acceptance for convenience is not an approval of such theories.
Through the courtesy of the parties to this suit, the computations, the results of which are herein stated, have been made and carefully verified by two expert accountants, Mr. Piper, of the Ann Arbor Company, and Mr. Parker, of the Attorney General’s office, working together, and hence are accurate and correct.
Allocation to Passenger and Preight Services. — Applying plaintiff’s theories and ratios to the corrected values above stated, the resultant assignment of property values to the passenger and freight services, respectively, is as follows:
1914. Passenger. Freight. Total.
Fixed property .$1,663,526 00 $3,216,325 00 $4,879,851 00
Engineering expenses . 83,554 00 161.544 00 245,098 00
Rolling stock . 366,198 00 1,985,073 00 2,351,271 00
Interest, legal expenses, etc... 102,701 00 260,624 00 363,325 00
Working capital.'. 42,279 00 107,291 00 149,570 00
Toledo Terminal. 7,275 00 18,460 00 25,735 00
Totals ...$2,265,533 00 $5,749,317 00 $8,014,850 00
Supplemental to the above, plaintiff has added to the passenger values and subtracted from the freight values the sum of $79,360 as a so-called fuel adjustment. In other words, it is a charge and credit for freight property employed in the carriage of fuel and other materials used.in the passenger service. Such adjustment is incomplete and incorrect, in that no allowance is made for the carriage upon passenger trains of materials used and persons employed in the freight service. This item would amount to a considerable sum and might offset the charge so made. However, again adopting, but not approving, the charge and credit so made, and adding such amount to the passenger gide and subtracting it from the freight side of the account, the final figures are: Passenger, $2,344,893; and freight, $5,669,957.
1915. Passenger. Freight. Total.
Fixed property .$1,634,519 00 $3,069,240 00 $4,703,759 00
Engineering expenses . 85,828 00 161,167 00 246,995 00
Rolling stock. 1 402,251 00 1,805,474 00 2,207,725 00
Interest, legal expenses, etc. 106,778 00 253,327 00 360,105 00
Working capital . 42,777 00 101,488 00 144,265 00
Toledo Terminal . 7,440 00 17,652 00 25,092 00
Totals .$2,279,593 00 $5,408,348 00 $7,687,941 00
Fuel adjustment . +67,776 00 —67,776 00
Final totals.$2,347,369 00 $5,340,572 00 $7,687,941 00
lit! 4. Passenger. Freight. Total.
Revenues (actual) . $046,324 26 $1,401,753 84 $2,048,078 10
Operating expenses. 510,245 73 1,239,285 97 1,749,531 70
Net income... $136,078 53 $102,467 87 $298,546 40
Value of property... 2,344,893 00 5,609,957 00 8,014,850 00
Rate of return. 5.803% 2.805% 3.724%
1915. Passenger. Freight. Total.
Revenues (actual)...... $(532,891 57 $1,044,096 37 $2,277,587 94
Operating expenses. 507,101 05 1,415,292 00 1,922,393 05
Net Income.. $125,790 52 $229,404 37 $355,194 89
Value of property... 2,347,369 00 5,340,572 00 7,687,94L 00
Rate of return.... 5.359% 4.296% 4.620%
Auxiliary Service. — Plaintiff carries mail, express, and milk on its passenger cars and trains. During 10 or 12 weeks in the summer season it gives sleeping car and parlor car service and an increased dining car service. These outside services require additional expenditures and yield separate revenues. Hence a further division of passenger revenues, expenses, and property values becomes necessary. The
1914. Passenger and Baggage. Auxiliary.
Revenues .. $528,203 69 $113,944 86
Expenses .... 405,900 48 109,431 65
Net income. $122,303 21 $4,513 21
Value of property 1,865,362 00 479,531 00
Bate of return... 6.557% 0.941%
*399 1915. Passenger and Baggage. Auxiliary.
Revenues . §523,508 78 $103,281 65
Expenses . 402,201 68 99,071 07
Net income. §121,307 10 $4,210 58
Value of property Rate of return... 1,900,065 00 446,704 00 6.382% 0.943%
If the ratios of plaintiff’s accountant (84.19% :15.81% in 1914, and 84.55% :15.45% in 1915) be applied to the corrected values and expenses and the receipts be properly credited, the resultant rates of return will be 5.380 per cent, from passenger and baggage and 5.559 per cent, from auxiliary service in 1914, and 5.563 per cent, from passenger and baggage and 4.164 per cent, from auxiliary service in 1915. Plaintiff insists that, under its contract with the government, it is carrying mail at a considerable loss, and that its milk traffic is not profitable, unless considered and treated as a mere transportation by-product. Hence, it may be fairly assumed that the lesser rate of return from outside services is more nearly correct than the greater one.
Intrastate and Interstate. — The contention that the cost per mile of the transportation of an intrastate passenger is greater than that of an interstate passenger is probably sound. But here, in one respect at least, the claim is pressed too far. Plaintiffs accountant first divides the expenses of passenger and baggage service into terminal and line haul. The further and final division of terminal property values and expenses is based upon the assumption that each intrastate passenger uses the Michigan station privileges twice, once in entraining and once in detraining, and that each interstate passenger, other than interline, uses such privileges but once. Hence, to obtain the number of terminal use units assigned to intrastate and interstate services respectively, the whole number of intrastate passengers is multiplied by two, the number of interline interstate passengers is also multiplied by two, and the number of interstate passengers, other than interline, is multiplied by one. The record shows that, upon the Ann Arbor Railroad, the average journey of the interstate passenger is more than 2% times longer than that of the intrastate passenger. It thus appears that, by the method of computation here employed, the terminal property values and expenses per passenger mile apportioned to the intrastate service are approximately five times in amount those apportioned to the interstate service. The record also shows that, in each year, about 250,-000 intrastate passengers pay cash fares upon the train, and hence make little or no use of the station privileges, and further that quite a number of so-called stations are mere platforms or sheds, without agents or other attendants. But, again applying plaintiff’s theories, and recasting the figures to conform to the necessary changes in values and expenses, the final schedules are as follows:
Passenger.
1914. Interstate. Intrastate. Total.
Revenues (actual)...$137,592 86 $390,610 83 $528,203 69
Expenses .. 101,876 38 304,024 10 405,900 48
Net income. $35,716 48 $86,586 73 $122,303 21
Value of property 502,374 00 1,362,988 00 1,865,362 00
Rate of return.... 7.110% 6.353% 6.557%
*400 Passenger.
1915. Interstate. Intrastate. Total.
Revenues (actual).... $127,709 51 $395,799 27 $523,508 78
Expenses ..... 87,274 92 314,926 76 402,201 68
Net income...$40,434 59 $80,872 51 $121,307 10
Value of property. 440.653 00 1,460,012 00 1,900.665 00
Rate of return.. 9.176% 5.539% 6.382%
Freight.
1914. Interstate. Intrastate. Total.
Revenues (actual).$*1,09.1,002 70 $310,751 14 $1,401,753 84
Expenses .. 985,544 39 253,741 58 1,239,285 97
Net income.. $105,458 31 $57,009 56 $162,467 87
Value of property.$4,893,455 00 $776,502 00 $5,669,957 00
Boat property (erroneously stated)... 517,994 00 110,259 00 628,253 00
Total values.. $5,411,449 00 $886,761 00 $6,298,210 00
Rate of return. 1.948% 6.428% 2.579%
1915. Interstate. Intrastate. Total-
Revenues (actual).81,287,567 00 $357,129 37 $1,644,696 37
Expenses . 1,149,914 26 265,377 74 1,415,292 00
Net income. $137,652 74 $91,751 63 $229,404 37
Value of property, including boats, $741,018 00 . 5,305,084 24 776,505 76 6,081,590 00
Rate of return. 2.595% 11.816% 3.772%
To even summarize in this opinion the many computations which have been made since the hearing of this case would only add to the unfortunate confusion and perplexities already existing. The results herein stated are those most favorable to plaintiff. The work sheets of all computations will be preserved, and will be available at any time to the parties or their counsel.
The evidence shows that much more than one-half of plaintiff’s revenues are derived from the transportation of interstate freight, and that a large part of such freight is low grade and produces but little more income than expenses. It is apparent that the inadequacy of return, of which complaint is made, results from this traffic, rather than from the intrastate business of the railroad. Untried and imperfect theories, which conflict with actual conditions, are unsafe guides, and furnish no warrant for judicial nullification of legislative enactments. Plaintiff has failed in its attempt to prove that the intrastate rates fixed by the Michigan statute and by the orders of the state Railroad Commission are confiscatory.
A decree will be entered, dismissing the bill of complaint, with costs to the defendants to be taxed.